Biden administration seeks to regulate Stablecoin issuers as banks

These measures aim to address fears among regulators that stablecoins – digital currencies pegged to national currencies like the US dollar – could fuel financial panics and need to be more tightly regulated.

Stablecoins are issued by companies such as Tether Ltd. and Circle Internet Financial Inc. and are designed to combine the stability of national currencies like the dollar with the ability to trade quickly online like bitcoin. But some policymakers have said that stablecoins could fuel instability if users come to doubt the value of their underlying assets that are keeping their prices stable.

A Treasury-led group also plans to recommend that a separate group of senior regulators tasked with detecting risks to the financial system – the Financial Stability Oversight Council – consider designating stablecoin business as systemically important, have people said. Such a process could ultimately lead the Federal Reserve to draft stricter risk management standards for companies if they are not already federally regulated.

But the FSOC path is not the preferred approach of the Biden administration, the people said. The decade-old panel process to target companies for stricter regulation is historically cumbersome and should be applied in a new way in this case, to cover payment activities related to stablecoins. , instead of targeting a specific set of non-bank financial companies.

The administration’s recommendations are expected to be included in an upcoming report from a group led by the Treasury Department, called the President’s Task Force on Financial Markets, which is now expected to be released in late October, the people said. The group includes Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chairman Gary Gensler.

Officials warn that the report is not yet complete and its recommendations are still being negotiated. It is unclear how some of the recommendations might be implemented, a potential weakness of the next report.

While the report is likely to focus primarily on the risks posed by stablecoins and how to impose a bank-like framework on the companies that issue them, other key issues are likely to remain unresolved, such as protection. investors around the trading of stablecoins, distinct from the regulation of the companies that issue them.

From an administration perspective, it would be preferable for Congress to impose or allow a banking-like regulatory framework for stablecoins, as well as a series of investor protections for cryptocurrencies. If Congress does not act and its other recommendations go unheeded, the administration would not hesitate to use the FSOC, one of the people said.

Currently, many stablecoins are lightly supervised at the state level, although some companies, such as Circle, have said they are looking to become banks. And at least some members of Congress, such as Senator Cynthia Lummis (R., Wyo.), Have recently signaled that stablecoins may need to be regulated in this way.

“Stablecoins may only be issued by depository institutions” or by regulated companies such as mutual funds, Ms. Lummis said in a Senate speech this week.

Stablecoins, which are based on the same blockchain technology as assets like bitcoin, are a relatively small but rapidly growing corner of the $ 2 trillion crypto world. The value of the big three, Tether, Circle’s USD Coin and Binance USD, has reached around $ 110 billion, up from around $ 11 billion a year ago.

Since stablecoins are backed by safe assets like treasury bills, they should maintain a strong bond with the dollar and be easily exchanged for dollars, according to issuers. This contrasts with cryptocurrencies like bitcoin which are not asset backed and can fluctuate in value wildly.

Current and former regulators fear that stablecoins will be vulnerable to the equivalent of a bank run if a large number of investors suddenly rush to buy them out, forcing sponsors to sell the assets at clearance prices and putting potentially straining capital markets as well.

For now, however, stablecoins are primarily used by investors to buy and sell crypto assets on exchanges such as Coinbase.,

which processes transactions 24 hours a day. They are also used as collateral for derivative products (contracts to buy or sell an underlying security at a specified price) and many of these contracts are settled in stable coins.

Administration officials say that if coins are adopted more widely as a fast payment method for consumers and businesses, it could put them in competition with banks and card networks like Visa. Inc.

and Mastercard Inc. Diem Association, a group supported by Facebook Inc.

and 25 other members, is looking to launch a stablecoin that will take advantage of the social network’s three billion users. Diem is partnering with a Fed-regulated bank on the project.

Write to Andrew Ackerman at [email protected] and AnnaMaria Andriotis at [email protected]